As part of the Spring Statement this month, Philip Hammond expressed the UK Government’s desire to tackle late payments and announced a 'Call for Evidence' into the issue.
While Philip Hammond’s words are laudable, we believe there is already enough information out there to act. We don’t need more reports, research and talk – we need companies to change their ways and take seriously their responsibility to pay on time.
This is because the threat is serious - late payment is turning into an epidemic and threatening to bring down thousands of small businesses. In March, the Federation of Small Business (FSB) warned that more than four in five companies are being paid late and one in three businesses claim the situation is getting worse rather than better.
This is despite the fact that the Government has tried to strengthen the Prompt Payment Code (PPC), and introduced legislation to make larger firms report on their payment practices. None of these acts have generated the hoped-for change in culture.
Good intentions thwarted
The Prompt Payment Code (PPC) was created by the UK government in 2008 and established a set of principles for businesses that committed them to pay on time and fairly. So far, more than 1,700 businesses and public authorities have signed the Code.
However, despite good intentions, Tungsten Network's own analysis of the reported payment practices reveals a worrying trend. Signing up to the PPC seems to make no impact on time to pay. We found that PPC signatories take on average 44.6 days to pay, whereas those who haven’t officially signed up take 44.7 days. In addition, more signatories (36%) fail to pay their suppliers within the agreed terms compared to non-signatories (30%). This is deeply troubling.
While businesses of all sizes welcome the sentiment behind the PPC it appears to be wholly ineffective.
Carillion - the final nail in PPC coffin
The collapse of construction firm Carillion further exposed the inability of the PPC to herald change. Despite being an early signatory of the PPC, Carillion often paid its subcontractors 120 days late. Following its demise, it owed a staggering £1.5bn to 30,000 suppliers.
Mike Cherry, National Chairman at the FSB said: “Sadly this sorry saga has laid bare the frailties of the Prompt Payment Code. While it is fundamentally a good idea, it does not work when it is most needed – as shown with Carillion’s behavior since July 2017.
“Although they were signatories of the PPC, Carillion were able to use their dominant position to squeeze smaller firms to mask their own financial failings. This irresponsible behavior has put many small businesses in jeopardy, with countless people fearing for their jobs.”
Sadly, until there are penalties or consequences for flaunting the rules of the PPC, it will just be a piece of paper.
Where does the hope lie?
As CEO of Tungsten Network, a platform that handles billions of transactions every year, I firmly believe that payments should be frictionless and that legislation or a naming and shaming approach can only go so far. Instead, the Government and businesses should look to technology to improve the situation – as it has done in so many other areas of operating a successful company.
A further analysis of the payment reporting figures reveals promising data – using electronic rather than manual e-invoicing systems helps businesses pay their suppliers faster.
We found that 174 of the 587 businesses that have reported so far offer e-invoicing to their suppliers and the average time to pay for e-invoicing users is 41.7 days, 4 days faster than non-users (45.9 days). Also, e-invoicing users are more likely to pay their suppliers within the agreed terms – 71% meet the terms, compared to 69% of non-users.
The government guidance for businesses on e-invoicing echoes this: “Invoice document management systems software allows documents to be electronically exchanged, and means a more streamlined process with less manual intervention. This can make the process of payment faster for the supplier.”
E-invoicing can really make a difference in smoothing over the payment process and encouraging timely payment.
Technology that brings change
There is a common misconception that late payments are solely a result of managing working capital or businesses holding onto their funds for as long as possible. However, our research shows that when it comes to late payments, clunky internal processes and slow paper-based systems are the predominant causes, leading to friction in the supply chain. Therefore it follows that if there is a way to eliminate paper and improve internal processes, payment would occur more smoothly.
Day after day, we observe that the companies that opt to make use of technology to streamline and digitise intensive manual processes not only reap the rewards themselves, but also for those who they work with up and down the supply chain.
In this way, technology has the potential not only to directly address the problem of late payment, but to strengthen the network of buyers and suppliers whose hard work keeps the UK economy moving. This is what gets us out of bed each day and championing the cause - late payment really can be a thing of the past, if only the nation’s businesses would look to technology for help.